One may not think this to be a deep and philosophical question, but it is one that burrows deep in the minds of many employers. Small business owners want to offer benefits, but it is often overlooked in favour of raises with the assumption that it makes employees happier. Here are some reasons to rethink that position.
The Glassdoor Employee Confidence Survey determined that around 79% of employees favored additional perks or benefits to pay raises[1], with the trend standing out most heavily among women and younger workers. Business owners may be able to find significant savings in the “Payroll” line-item of their budgets by offering employees new benefits or perks instead of salary increases.
Offering added perks and benefits could be a useful recruiting tool. Millennial employees flock to employers that will help them achieve a healthy balance between work and their personal lives. Members of Generation Y also tend to have strong value systems and view work as an outlet to help better themselves and the world, rather than just a means to a paycheque—meaning their salary expectations are lowered. The demand for these kinds of perks likely stems from millennials’ desire to maintain their lifestyle, which they wouldn’t be able to do without their employers’ help.
What are some of the hidden costs of a pay raise?
• Canada Pension Plan / Quebec Pension Plan (CPP/QPP)
• Employment Insurance (EI)
• Workers Compensation
A 5% pay raise can cost the employer up to an additional 16% on payroll taxes, while the employee can lose 42% of that raise to the government.
If we do a deep-dive financial analysis, offering benefits can save you (the employer) money and put more in the pocket of your employee, let’s explore two of the options:
Option 1: Health and dental plan
If instead of raise, the money was used to pay for a health and dental plan there would be tax advantages to both the employer and employee.
- Employee benefits premiums paid by the employer are tax-deductible to the business
- and mostly a tax-free benefit to the employee (health and dental are non-taxable)
Raise: If an employee were given a $3,000/year raise to an employee earning $50,000 per year in Alberta, it would translate to a higher employer payroll tax and the income is fully taxable in the hands of the employee:
- $3,000 pay increase MINUS Canada Pension Plan deductions MINUS Federal Income Tax MINUS Provincial Income Tax = $1,927/year in their pocket
Health & Dental Plan: If instead of a raise, the full $3,000 can be used for the employee for orthodontics, massages, dentist, prescriptions, life or critical illness insurance, etc. Without a health & dental plan these would be paid by the employee out of their pocket after income tax is paid.
It may not be extra cash in their pocket, but your employees will thank you every time they don’t have to personally pay their dentist bill.
Option 2: Employee Retirement Plan
Let’s face it, a lot of people wait too long to start thinking about saving for retirement and majority of your employees are no different. If that $3,000/year were invested for their retirement, not only could they immediately save on income taxes, but they avoid the decision fatigue of deliberating every month if they should save for retirement or hit up that Nordstrom’s sale. The battle’s already been won, in the most painless way possible; someone else is doing all the work and employees see this a more valuable than a raise.
Organizations that do not offer a Group Savings plan should take note – 69% of Canadians say they would choose a new job with a plan over a current one without it. This could clearly impact the ability of small to medium-sized businesses to retain talent if they don’t offer Group RRSPs [2]
There are so many components of a business that an owner must think about … we know, we have been there too. That is why we have made it our mission to help small to medium business owners by providing access to the information you just don’t have the time to research. We help bring your business to a new level of achievement while making sure the i’s are dotted and the t’s crossed along the way.
If you want to discuss group benefits or group savings, feel free to give us a call … we offer free consultations.